Businesses and their needs are ever changing and with changing times lending associations too have altered their norms and operating procedures to adapt to the changing needs. Businesses today are of multiple kinds and to catering to their needs with a single solution is no longer possible. One solution that fits the need of all is not valid anymore, not in this case at least. If you are an entrepreneur who is looking to raise debt or are an aspiring entrepreneur testing the waters before you step, this is an article you should continue reading.
On a broader classification, business loans are categorized as secured business loans and unsecured business loans. These cater to the need for a variety of applicants and are tailor-made to fit the needs of all.
Secured business loan: As the term suggests, these business loans are secured by having the applicant safeguard the debt by offering a collateral. Acceptable collateral ranges from private property, commercial property, gold, bonds, stocks, and heavy machinery equipment.
Due to the presence of such safeguarding elements, the interest for these loans are smaller and the tenure longer. That said, the rate of interest and the tenure offered will also depend on the credit score of the applicant.
Unsecured loans: These business loans are often chosen by those who cannot/do not wish to offer any collateral for raising a debt. Due to the embedded risk that comes along with this type of debt, lenders or lending associations generally levy a higher rate of Interest and smaller tenures when compared to secured loans.
That said, applicants (mostly entrepreneurs) choose to opt for these types of loans as they do not require a guarantor, a collateral, and have quick processing periods. It is obs ,erved that these types of loans are chosen to bridge gaps in working capital or address sudden spikes in expenditure due to business expansion.
5 types of business loans you should know about before approaching a lending institution:
Term loans generally are raised for running a project or beginning a new project. The longer tenure for repayment makes this a viable option to choose for entrepreneurs who are not looking to generate immediate profits but are in it for the long run. The term generally ranges between 5 to 20 years. These loans can be paid in weekly/monthly/quarterly intervals. These business loans are generally secured in nature but sometime can be availed as an unsecured one too depending on the lender and the transactional history of the applicant.
These business loans are typically opted by businesses that are into the import-export/service industry which have a significant processing period from the time an invoice is raised and the same is cleared by their customers.
In Invoice based business loans, companies can apply for a loan on the invoice raised and the lender keeps a certain portion of the invoice as interest and other processing fees once the invoice is cleared. This is a great way for organizations to utilize working capital without having to offer any collateral for raising the debt. That said, the application process for these loans are stringent as the applicant will have to offer supporting documents, transaction history and proof of work from partners (customers).
Loan against equipment:
These business loans are generally preferred by Medium and Large scale industries that require capital for purchasing heavy machinery. These are secured loans that more than often do not require any collateral as the lender uses the machinery itself as a fail switch. The tenure for these loans ranges between 3-5 years depending on the capital and can be extended too, upon the discretion of the lending association.
Due to the expense involved in sourcing industry equipment, the lending ranges between INR 5 crores to INR 100 crores. These loans are further classified according to the nature of use for ease in processing. The major classifications include healthcare, IT and office, and Industrial equipment.
Pradhan Mantri Mudra Yojana:
The Pradhana Mantri Mudra Yojana is a government of India initiative to offer business loans to non-corporate and non-farm small and micro businesses. This aims to create and sustain a value based entrepreneurial culture in India’s budding ecosystem. This loan is further is staged in 3 phases of a business.
This being the initial phase of the business is eligible to raise a debt of up to INR 50,000.
Kishore: In the intermediary stage, the business loan sanctioned varies from INR 50,000 to INR 5,00, 000.
In this stage, the business loans sanctioned range from INR 5,00,000 to INR 10,00,000.
These loans can be availed from commercial banks, RRBs, Small finance banks, cooperative banks, MFIs, and NBFCs.
In these kinds of business loans, lending institutions have been advised by the government of India to not collect collateral securities for up to a sum of INR 10,00,000.
Stand Up India:
The Standup India business loan is a government of India initiative to offer at least one person from the scheduled caste or the scheduled tribe or a woman entrepreneur from every single branch financial aid ranging from INR 10 lakhs to INR 100 lakhs. These loans can be availed by SC/ST woman to set up a new manufacturing or service based companies.
In this initiative, for added convenience and ease in repayment, the interest is restricted to 3% per tenor and the tenure is between 18 months to 7 years depending on the applicant.
While these new business loans are prominent, there are a plethora of other lending options available to choose depending on the nature of requirement and the credit score of the applicant. These business loans helps businesses raise working capital, raise debt for expansion, and also raise debt for starting new startups and small and micro-scale enterprises. These private and government bases lending institutions together help in nurturing a sustainable ecosystem that continuously promotes a culture that supports the development of entrepreneurs from different walks of life.